2021 China's Evergrande crisis and its ripple effects

Here is a wonderful thread from Sahil that you can read on Twitter here. 

Evergrande is the train wreck that the financial world and media can’t help but watch. Here’s breakdown on the story:

The Evergrande Group is a Fortune 500 real-estate developer with headquarters in Shenzhen, Guangdong, China. It was founded by Hui Ka Yan in 1996 in Guangzhou. It's a big business: as recently as 2020, it had sales of >$100 billion and adjusted core profits of ~$5 billion. 

At its core, it's a homebuilder business.Its website states that it has over 1,300 projects across 280+ cities. But it has pushed the boundaries, making investments in EVs, an internet and media production company, a theme park, a soccer club, and a mineral water company.

As a developer, Evergrande had to contend with a highly cash-consumptive growth profile. Building a new project may take many months and requires a lot of cash outflows along the way. Cash collections (from buyers) come later, with the exception of smaller upfront deposits.

So how did Evergrande fund its impressive growth? Debt—it borrowed aggressively, even by real estate property development standards. It became the world's most heavily-indebted developer, with a debt load of over $100 billion and over $300 billion in liabilities.

As is pointed out in the brilliant thread below, there is a bit of a moral hazard problem that was created along the way. Evergrande was largely indifferent to pricing on the land it was purchasing, knowing that the risk would be passed off to banks financing the purchases.

The debt-fueled growth propelled Evergrande (and its now billionaire founder) into an elite class. It entered the Fortune 500 at #496 in 2016 and reached #122 by the latest ranking. But debt is a double-edged sword—and Evergrande was due to catch the other edge.

As its debt burden grew, so did the interest payments on that debt. This is (mostly) fine, so long as revenues and profits—with which you can make these payments—continue to grow. But if the growth or profitability slows (or government restricts borrowing!), it's...not fine. 

Imagine a metaphorical boa constrictor tightening its grip on its prey. You can try to borrow more to make your payments, but that only fuels the snake. Moreover, the knowledge of your precarious position increases risk and makes that borrowing more challenging and costly. 

In Evergrande's case, the snake tightened its grip in 2020. It had its first major liquidity scare—a potential inability to meet its liabilities—sending a letter to the local government warning that upcoming payments could cause a crisis with systemic financial sector risks.

As with most de-leveraging spirals, there is a technical side (inability to make payments) and a psychological side (the knowledge of instability impacting your market standing). The psychological is damning. Reports of the letter sent Evergrande’s stock and bonds tumbling.

The short-term crisis was avoided—an investor group didn't force a big repayment—but the long-term remained.Dornbusch's Law says that crises take longer to happen than you expect, but then happen faster than you ever could have imagined. This proved true for Evergrande...

To meet its ever growing obligations, Evergrande began tapping into "creative" financing strategies. It pushed employees to provide short-term loans to the company—which it called "high interest investments”—in order to ensure they received their year-end bonuses.

But the company quickly fell behind, missing payments earlier this month and leaving thousands of employees in a lurch. With over $7.4 billion of bond payments due in 2022, and large interest payments coming up as soon as this Thursday, the crisis appears to be accelerating.

To reiterate, the psychological side is just as impactful as the technical. It was recently reported that Evergrande was offering to sell properties at a deep discount—indicating a fire sale required to make its payments and sending further panic spiraling into the market.

Protests have broken out at Evergrande offices in China—with up to 1 million homebuyers left in a devastating limbo, having paid deposits upfront for homes that may never be built. The media narrative cycle of demise ramped up in earnest and further fueled the fire. 

Importantly, the Evergrande situation poses a systemic risk to the Chinese economy. With deep ties to financial institutions and working class consumers across China, a disorderly collapse would have far-reaching impacts (financially and emotionally). 

But China is caught in a very tough spot. Act quickly with a bailout and be viewed as condoning the financial excess that led to the problem. Fail to act and allow the collapse to ripple through the entire economy that is just recovering from COVID shocks of 2020/21.

The Evergrande situation will undoubtedly continue to play out in public in the days and weeks to come. For more on this story, check out the resources below: 

https://www.bloomberg.com/news/articles/2021-09-13/what-is-china-evergrande-and-why-is-it-in-trouble-quicktake?sref=UGGkDWbK … 

https://www.wsj.com/articles/how-beijings-debt-clampdown-shook-the-foundation-of-a-real-estate-colossus-11631957400 …19/ 

EVERGRANDE WATCH — UPDATE: Evergrande issued a hazy statement on Wednesday, stating that the interest payment due Thursday on one Yuan-denominated bonds “has been resolved via negotiations off the clearing house.” No other specifics were offered.What does this mean? The clearing house is a centralized authority through which Chinese companies typically pay interest on their local currency-denominated bonds. Direct repayment—as is implied here—is generally only used in cases where the company is looking for a special payment arrangement. This effectively provides a company like Evergrande with a way to make a payment out of formula with the actual bond terms while avoiding technical default. The proverbial can has been kicked down the road…for now. 

EVERGRANDE UPDATE: Trading on Evergrande shares was halted pending an announcement of a transaction. Reports indicate that Chinese developer Hopson Development Holdings will acquire 51% of Evergrande’s property-services unit for ~$5.1 billion (~28% discount to market value). Evergrande had spun-off the property-services unit in December—raising ~$1.8 billion in that transaction. While providing some relief, Evergrande has another $260 million bond payment due today, and it remains unclear whether recent bond payments due have been paid in full. Where there’s smoke, there’s fire...

Fantasia Holdings Group—a Chinese luxury property developer—missed a $206 million bond payment and a private bond payment yesterday. Fitch downgraded Fantasia to “restricted default” after the misses.

👀 on the Chinese property sector.

2021 energy crisis explained using economics 101

Here is a wonderful thread from Sahil that you can read on Twitter here. 

China is facing a severe energy crisis that threatens to compound supply chain woes and derail the global recovery.Here’s a simple breakdown of the situation:

With Evergrande and supply chain disarray stealing the spotlight, a growing energy crisis has (mostly) flown under the radar. China is feeling the pain, but the contagion is poised to spread globally. 

This article provides a simple framework for understanding the key drivers:

What are the visible impacts of China's energy crisis? More than half of China's mainland provinces have been forced to limit electricity usage due to shortages. The largest industrial provinces are facing cuts just as they try to dig their way out of the supply chain woes.

Globally, widespread concerns over rising coal and natural gas prices (the latter of which deserves its own thread in the future) are causing a stir. Policymakers are expressing real angst over the ability of their countries to adequately heat homes as winter months approach. 

In attempting to understand the situation, it's important to understand that the economy is an interconnected web of activity. Nothing happens in a vacuum. This means that an energy crisis in China is not just about China—it has a complex set of causes and effects.

In this situation, China's crisis is primarily related to coal. While out of vogue, coal remains a key source of electric power globally.

The science for dummies: Coal is burned, the heat boils water and produces steam, which drives a turbine, which produces electricity.

To dissect the coal-driven crisis (and its ripple effects), we need a simple framework. Let's turn back to our Econ 101 classic: Supply & Demand. Supply is everything related to energy production. Demand is everything related to energy consumption. I'll cover each side:

First, demand. This is relatively straightforward: demand for coal (and the electricity it produces) is very high (and rising). The robust global recovery from COVID—and the resulting impact on goods manufactured in China—is one key driver.

Domestic residential coal-powered electricity demand is also up, with a hot summer and lower than normal hydroelectric production. This latter point is worth noting, as it's a supply constraint in one area (hydroelectric) creating a demand surge in another (coal electricity).

Next, supply.

This one is more complex, with several distinct—yet interconnected—dislocations. The main supply dislocations that I see here are: (1) Coal Shortages (2) Import Restrictions (3) Utility Price Fixing (4) CCP Emissions Targets

Let’s cover each:

Coal ShortagesGlobal coal supply has been constrained. Coal mines have faced COVID-related shutdowns. Further, concerns over the PR risk of opening new coal production have held back new entrants. Rising global coal prices haven't led to new supply entering the market.

Import Restrictions

While coal supply has been constrained, China has taken actions that have exacerbated the problem. They cut Australian imports—previously 10% of Chinese coal consumption—over a political spat. Similar story with Mongolia over anti-corruption crackdowns.

Utility Price Fixing

In China, utility companies face standard pricing set by the government. This means they cannot raise prices when their input costs spike (as they have). Utilities are often better off shutting production—which they have done—vs. producing at a loss.

CCP Emissions Targets

President Xi Jinping has made a public pledge to cut carbon emissions—with a goal to reach peak emissions by 2030. Positive for the environment, but the policy has led to provinces instituting curbs and blackouts for energy-intensive businesses.

So looking at all of this through my (admittedly) simplistic framework, here's what I see: On one end, a structural surge in demand. On the other end, a number of significant supply challenges and dislocations. Yet again, we have demand up and supply down.

The net impact: widespread energy shortages in China, sharp price increases, and continued production delays. For supply chains, this means continued woes. For consumers, this means rising prices. In our interconnected economy, nobody is insulated from this disruption.

I hope this simple breakdown helps you feel more well-informed about the coming energy crisis.

I highly recommend the below articles, which also supplied several of the charts: 

https://www.wsj.com/articles/chinas-power-shortfalls-begin-to-ripple-around-the-world-11633101100 … 

https://www.bloomberg.com/news/articles/2021-09-30/china-orders-top-energy-firms-to-secure-supplies-at-all-costs?sref=UGGkDWbK …

https://www.bloomberg.com/news/storythreads/2021-09-28/global-energy-shortage-why-is-everyone-talking-about-a-power-crunch?

2021 global supply chain disarray using economics 101

Here is a wonderful thread from Sahil that you can read on Twitter here. 

By now, you’ve probably heard that global supply chains are in a state of disarray.

Here's a simple breakdown of what’s causing it:

There's a lot of talk right now about the global supply chain crisis.@Business published an article subtitled "Inside the Brutal Realities of Supply Chain Hell”—it's getting serious.

This thread provides my (very) simple framework for understanding the key drivers:

First off, what are the visible impacts of the crisis?

Product delays (good luck getting appliances before 2022), product shortages (see semiconductors), port buildups (fly over LA and you'll see), and rampant freight costs (sorry, retailer margins).

It's pretty bad.

Global supply chains are very complex. We live in a highly-interconnected world. A butterfly flaps its wings in Shenzhen and impacts when I receive my bike in New York. Ok, maybe not quite, but almost...So to understand the drivers of the crisis, we need a simple framework.

Let's break down what is happening using an Econ 101 classic: Supply and Demand.

Supply here refers to everything related to manufacturing, production, and transportation. Demand here refers to everything related to consumption. I'll walk through each side: 

First, demand. 

This one is pretty simple: it's through the roof. Consumers are flush and not afraid to spend. Further, lockdowns and restrictions have meant more spending on goods vs. services. So you have a ton of demand for goods--those goods need to come from somewhere!

Next, supply. 

This one is more nuanced.The major supply drivers I see here:(1) Factory shutdowns (2) Port shutdowns (3) Flight reductions (4) Container ship challenges

Hitting each one quickly:

COVID Factory Shutdowns

Factories—particularly in Asia—have had a tough time managing and containing outbreaks of Covid. This leads to delays and bottlenecks in production. If an upstream manufacturer is delayed, that impact cascades downstream and has an extensive impact.

COVID Port Shutdowns

Ports have experienced similar challenges—any have had to shut down or restrict labor to avoid outbreaks. If ports are closed, products can't flow smoothly through the supply chain. It's like creating a kink in a hose and watching pressure build.

Flight Reductions

It's news to most people, but about 50% of air cargo flies on passenger flights. It's a great revenue stream for passenger airlines. But with travel—especially international travel—reduced by COVID, there was a significant reduction in air cargo capacity.

Container Ship Challenges

The Ever Given clogged the Suez Canal in March, causing a backlog whose impact cascaded through global supply chains. There aren't enough large container ships to meet all of this demand and containers are in the wrong places at the wrong times. 

So looking at all of this through my simplistic framework, here's what I see: On one end, a structural surge in demand for goods. On the other end, a number of significant supply challenges and dislocations. Demand up, supply down.

The net impact: sharp shipping and production price increases, shortages, and massive delays. For consumers, this means rising prices, as these rising supply chain costs are passed through. Your holiday shopping may be a whole lot more expensive (and late) this year...

I hope this simple breakdown helps you feel more well-informed about what is happening with the global supply chain crisis.

Also, these articles are great:

 https://www.wsj.com/articles/germanys-christmas-king-gets-caught-up-in-shipping-chaos-11632475801 …

https://www.wsj.com/articles/cargo-delays-are-getting-worse-but-california-ports-still-rest-on-weekends-11632648602?st=yebv3p3pzoj1p06&reflink=article_email_share …

By the way, if you’re looking for Christmas presents that you can get at a reasonable price, I hear Evergrande has some really nice half-finished apartments on offer at a deep discount…

Looks like a lot of people are flocking to Evergrande offices to take advantage of this limited time opportunity!

Joseph Hope, Editor-in-Chief of the New York Times: On India under Narendra Modi

Joseph Hope, Editor-in-Chief of the New York Times:

Narendra Modi's sole aim is to make India a better Country. If he is not stopped, in the future India will become the most Powerful Nation in the World. It will surprise the United States, the United Kingdom & Russia. 

Narendra Modi is moving towards a specific goal. No one knows what he wants to do.

Behind the Smiling face, a dangerous Patriot. He uses all the Countries of the world for the benefit of his Nation India.

Destroyed US ties with Pakistan and Afghanistan.

Narendra Modi has created an alliance with Vietnam, shattered China’s Superpower dream and made use of the 3 Countries. The longrunning dispute over oil extraction overseas between Vietnam and China has benefited India. With India's support,Vietnam began producing Oil in China's Southern Seas. It supplies all of its Oil to India. The United States has different support for this.

Modi made Pakistan a poor Country. He brought the Port of Iran under his control.

He has set up an Indian Military base on the border with Afghanistan, very close to the area that divides Pakistan. In order to increase Indian trade, he has also built a route through Iran, bypassing Pakistan, to Afghanistan.

Narendra Modi’s election promises are being completed one by one.

Article 370 and 35A have been repealed. 

One day, he will completely capture Pakistan occupied Kashmir. Pakistan will fall into 4 pieces in the coming seasons. This will happen with Narendra Modi at the helm. 

In Asia, this man who finished China & the United States canceled the SAARC Summit and showed his power to the World. Narendra Modi has succeeded in maintaining India's superiority over Asia

He made UAE fine the Foreign minister of Pakistan on landing in UAE & sent the minister back. 

Russia and Japan, 2 of Asia's Major Powers, have done nothing to say.

He held both Countries in his hands with great precision. In the case of China's Vietnam Oil issue, China will ask for Oil. Then he will ask Pakistan Occupied Kashmir.

What he would ask was, "I'll take it. You have Hair in your Mouth," and tease China's Vietnam issue.

Nothing can be done by China. This person is taking Indian Politics to a different level.

Many Countries think and act that each Country has many Enemies.

But India has no Enemies other than Pakistan. India is almost certain to be a friend to all Countries of the World. This man is doing more harm to Pakistan than the real War. By using Muslim Countries against Pakistan.

Narendra Modi has proven himself to be one of the Best leaders in the World

Even if Pakistan makes War with India, there will not be so much loss But now Pakistan is suffering more than that in negotiations with all Countries.

This person's Honesty must be taken into account.

India's progress will be difficult for the rest of the World.

With the current astounding growth of India, all the Countries in the United Nations will experience the consequences..!

INDIA'S CRYOGENIC ENGINES & JOE BIDEN

How Joe Biden blocked sale of Cryogenic Engines to India thru the 'Biden amendment'. May 1992.

Back in the 90s, US proposed a $24 Billion aid package to Russia. At around the same time, India was trying to get Cryogenic Engines from Russia at a value $250 million.

These engines were crucial for Indian Space program as they are needed to handle rocket fuel at extremely low temperatures to get the extra thrust required to carry heavier payloads into space.

President Bush was OK with this Russian deal with India but a democrat senator put in an amendment which stated that If Russia sold the cryogenic engine to India, this aid package would be scuttled!

This is the Biden amendment. 

“I am confident that the Russian leaders will recognize the wisdom of stopping this sale once they see the risk of losing their economic aid,” said Sen. Joseph R. Biden Jr. (D-Del.), who offered the amendment. “This is no minor sale; this is dangerous.”

Russia badly needed this aid. It had no choice but to back down from the deal it already had with India. 

In the same period, China was taking technology from Russia. This Senator, Joe Biden, of course preferred to look the other way as he considered only India to be the enemy of US.

It took years, but eventually India developed its own solution, on the little help it had from Russia prior to the cryogenic deal being scuttled.

Ultimately, the US also allowed Moscow to supply seven Cryogenic engines to India but without allowing technology transfer citing that the sale was not in line with the Missile Technology Control Regime (MTCR), which is supposed to prevent the proliferation of missiles. 

This was absurd as 

1. Neither Russia nor India was a member of MCTR.

2. Cryogenic engines are not considered capable of being used in long-range missiles like the Intercontinental Ballistic Missiles (ICBMs).

3. India has never invaded any nation and has not initiated any war with any other country or like Pakistan, supplied terrorists to any country.

India eventually developed cryogenic technology on its own after 20 years of research by ISRO.

Biden is no friend of India. He has held back India for decades. He is responsible to push back Indian space program by at least a decade!

His 2nd in command, Kamala Harris supports Pakistan on the Kashmir issue where Pakistan has illegaly occupied vast areas of Kashmir and even given some critical areas of Kashmir to China so the latter can build a road thru this region that connects China to Pakistan in the OBOR (One Belt One Road) initiative from China to establish a new silk route in the region to move Chinese goods.